Week 5
MCM- Tutorial 5
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Q1 (i). What are bond ratings?
Bond Rating
•
It’s indicating credit quality/ creditworthiness of bond issuance.
•
Bond ratings grades are assigned to bond issues based on extensive, professionally
conducted financial analysis to designate investment quality.
•
Ratings basically point to the default risk of an issue .
•
The higher the rating, the lower probability of default
the lower the yield of
an obligation.
•
A lower rating means greater default risk and has to be compensated with a
higher yield.
Q1 (ii). Discuss the benefit of bond ratings
Uses of Bond Rating
•
Individuals can depend on agency ratings as a viable measure to access creditworthiness of the issuer and
the issuer’s default risk. These ratings are deemed to be objective and reliable because they are done
by
an independent party.
•
Investors are able to make comparison among bonds in terms of risk and return
buy/ sell decision.
•
Eg. S&P striped UK AAA-rating to reflect the increasing risk resulted from Brexit. Moody and Fitch also
advocate such action with concern of UK economic.
a. Information Disclosure
b. Investors Protection
c. Lower Cost of Borrowing
d. Aids Pricing Decisions
Information Disclosure
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Investors are difficult to make informed choices because of lack of accessibility or the complexity of
information about the corporate issuer.
•
Rating agency has access to public as well as private information pertinent to the assessment of credit
risk. Such information is not usually accessible to the individual investor.
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- Fall '16
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